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Russian central bank hikes key rate to 7.75%

Russia's central bank raised its key rate to 7.75% from 7.50% in what it called a "proactive" move aimed at curbing elevated inflation risks.

The Central Bank of the Russian Federation said consumer prices, which rose 3.8% year over year in November mainly due to higher food prices, are starting to be affected by an increase in the value added tax set to take effect from Jan. 1, 2019.

"There persists uncertainty over the reaction of prices and inflation expectations to the upcoming VAT rate increase and to the influence of other pro-inflationary factors," said the central bank, which noted that businesses' price expectations have increased, triggered by the weakening of the Russian ruble and the VAT hike.

In addition, the bank said potential capital outflow from emerging markets and geopolitical factors might increase market volatility and affect exchange rate and inflation expectations.

The central bank expects annual inflation to be near its target of 4% at the end of 2018, before hitting 5% to 5.5% by the end of 2019 and returning to 4% in 2020.

"The increase in the key rate will help prevent firm inflation anchoring at the level significantly exceeding the Bank of Russia's target," the bank said in a statement.

The bank said it will consider the need for further rate hikes, taking into account inflation and economic dynamics, risks posed by external conditions, and market reaction.

Analysts at ING Economics said the rate hike was not "very surprising" although they were concerned "about the way these decisions have been communicated to the market."

"It appears the central bank is signaling lower confidence in CPI and the ruble in the short-term," the analysts said in a research note.